In recent weeks,
essentially all major PM miners have announced MASSIVE asset
write-downs, care of the PAPER PM raids that have taken gold and silver costs
below their respective costs of production. Not to mention, we have
seen development delays, capital expenditures and dividend cuts; with the
“granddaddy of them all – RESERVE and RESOURCE write-downs – waiting “on
deck.”
Alarmingly, one of the
largest write-offs was $1.9 billion from Goldcorp’s “crown jewel” Penasquito
project in Mexico; i.e., the raison d’etre for acquiring Glamis Gold
for $8.6 billion in 2006. Heck, even Fresnillo, the world’s third
largest silver miner – and more importantly, the largest primary silver
producer, with ALL its operations in Mexico – announced a series of dramatic
cost cuts and a 68% dividend reduction earlier this week. Fresnillo is likely
the world’s low cost silver producer; and thus, if it is
slashing costs, you KNOW the industry production outlook is dire.
Anyhow, I am focusing
here on Penasquito and Fresnillo because Mexico is the world’s largest silver
producing nation – accounting for roughly 21% of the 2012 total. In
other words, the fortunes of the Mexican mining industry go a long way
towards determining if global production rises or falls…
For years, I have written
of how massive Cartel PAPER raids directly correlate with lower
PHYSICAL production; as was the case after 2008’s Global Meltdown I,
when Cartel efforts to suppress PERCEPTION of PMs traditional safe haven role
yielded a more than 9% gold production decline – worldwide…
Today, however, the PM
production outlook is far direr; as discussed in “PRECIOUS METALS SUPPLY CRUNCH.” Dozens, if not hundreds
of exploration companies have been bankrupted by the Cartel’s post-2008
efforts to DESTROY the industry’s traditional “safe haven” appeal. Moreover,
with anti-PM PROPAGANDA at an all-time high, mining indices are plumbing
multi-decade lows; all but shutting down badly needed investment capital
to an already reeling industry…
Furthermore, with much of
the “low hanging fruit” – i.e, high-grade, low-cost deposits in
mining-friendly jurisdictions – already “picked,” the industry faces an
extremely steep cost curve, irrespective of the aforementioned price
suppression. Frankly, it’s no different than what I observed as an
energy analyst from 1996-2005; after which, the cumulative effect of similar
factors – not to mention, an extremely aged work force – caused prices
to permanently surge higher.
The indefinite delay
of Barrick’s MASSIVE Pascua Lama project – as discussed in “EVIL PERSONIFIED”; the TOTAL write-off of Kinross’ Fruta del
Norte project – per “THE ONLY MAJOR GOLD DISCOVERY IN A
DECADE – GONE, GOOD-BYE!”; and oh yeah, the likely permanent closure of Rio Tinto’s
Kennecott mine – which produced 10% of the U.S. silver supply; are prime
examples of how difficult it has become to maintain PM production
these days – let alone, increase it.
Back to Mexico, I just
read two incredibly ominousarticles from perhaps the best fundamental
PM analyst this side of the Atlantic – i.e., Steve St. Angelo of the SRS Rocco Report. In the first, he dissects
Fresnillo’s 1H 2013 earnings report – noting how at current PM prices, it may
actually post a 2H 2013 loss. Secondly, he notes that cumulative
Mexican Silver Production is down
a Stunning 10% in
the first five months of the year – compared to previous analyst expectations
of an increase…
Steve has been at the
forefront of discussing the dire PM production outlook for some time – with a
key to his analysis being, among other things, the increased ENERGY needs
required to maintain production. In other words, without substantially
lower energy costs, there’s not a chance PM production can be
meaningfully increased – let alone, maintained.
By the way, take note of
how low in the “production standings” the U.S. sits. In 2012, American
mines produced a measly 33 million ounces of silver – compared to the run
rate of 50 million ounces currently observed for 2013 U.S. Mint silver
Eagle sales. If production is falling worldwide, and the U.S. can’t
even produce enough to fund its own, legally binding U.S. Mint program
(for what that’s worth), HOW ON EARTH can they supply it without dramatic silver
import increases.
And for that matter, what
if the Cartel loses control in 2014 – yielding 100 million ounces of demand
for this one tiny silver buying program. Based on 2012 worldwide
production levels of 787 million ounces, that would represent a whopping
13% of 2012 supply – which could be significantly lower by 2014.
And oh yeah, U.S.-based silver buying represents less than 10% of
total global investment demand! Think long and hard of what I am
writing; and subsequently, if you believe it’s even possible for
silver prices to materially decline from here.
